Tiered interest rate revolving credit system and method

ABSTRACT

A method and a system for operating a revolving credit program utilizing a table of tiered interest rates in which one of the interest rates is applied as a finance charge to a remaining outstanding balance ( 20 ) of an account depending upon the percentage that payments made during a billing cycle ( 12 ) comprise of an account parameter, such as the outstanding balance, a highest balance or a beginning balance. In the preferred embodiment the applied interest rate ( 34 ) is determined by the percentage the outstanding balance ( 32 ) is reduced by payments on the balance during a billing cycle. Also in a preferred embodiment of the invention, the tiered interest rate table is structured to apply progressively reduced interest rates to outstanding balances reduced by progressively greater payment percentages from the previous billing cycle, thereby encouraging a credit customer to make larger payments and pay down the outstanding balance faster. Also in the preferred embodiment, the system calculates and displays ( 42 ) the minimum payments necessary to reduce the outstanding balance to meet each tier of the interest rate table.

BACKGROUND

This invention relates to methods and systems for operating revolvingcredit programs and, more specifically, to revolving credit programs inwhich the interest rate applied to an outstanding balance is varied.

Revolving credit programs typically are offered by banks, savings andloans, federal savings banks, credit unions and other credit providers,and operate to advance funds as cash advances or to pay for purchasesmade by a customer, such as through a credit card or a personal line ofcredit, and in some instances to pay for checks written by the customer,or to cover funds provided through other access devices, such asautomatic teller machines, telephone communication devices and personalcomputers. Under such revolving credit programs, the customer entersinto an agreement with a credit provider in which the unpaid balance ofthe customer's loan is assessed a finance charge which represents eithera fixed interest rate or a variable interest rate which is tied to theprime rate or some other interest rate index.

Once debt is incurred, the customer generally has three options forrepayment of the debt. One option is for the customer to pay the entireoutstanding balance and avoid assessment of any interest or financecharges, in the case of purchase transactions. A second option is forthe customer to pay a minimum amount required by the credit provider toreduce the amount of the outstanding balance and defer the remainingoutstanding balance for later payment. In that case, the customer isassessed interest or finance charges based on the remaining outstandingbalance.

Under the third option, the customer pays more than the minimum requiredby the credit provider but less than the entire outstanding balance. Ifthis alternative is chosen, the customer is assessed interest or financecharges in the same way as the second option.

There presently exist programs in which a tiered interest rate isapplied to an outstanding balance. Specifically, different interestrates are applied to various levels of an outstanding balance. Further,systems exist in which different interest rates are applied to varyinglevels of purchases, or to types of purchases. All such programs aredesigned to encourage the credit customer to increase purchase volumeand/or increase outstanding balance.

Levels of personal debt are reaching record-breaking highs and as aresult, credit card delinquency rates are increasing. The ratio of totalhousehold debt to disposable income has reached a record high.Accordingly, there is a need for a revolving credit system whichprovides an incentive to encourage a credit customer to pay off his orher outstanding balance quickly. Furthermore, such a system should beentirely automated and operable on the platform of a personal computeror computer network.

SUMMARY

The present invention is a fully automated system and method forproviding a revolving credit program through a credit provider whichhelps revolving credit customers gain control over their finances andencourages responsible financial management. In a preferred embodimentof the invention, a revolving credit system and method are provided inwhich the interest rate finance charge applied to the outstandingbalance of a customer's account varies according to the percentage ofthe outstanding balance paid by a customer in a billing cycle. Thegreater the percentage of the outstanding balance paid off by thecustomer in a billing cycle, the lower the interest rate applied to theremaining unpaid outstanding balance during the next billing cycle. Inthe alternative, the interest rate finance charge can be variedaccording to the percentage of other parameters of the account, such asbeginning balance, highest balance or average balance in the billingcycle.

Also in the preferred embodiment, the system and method provides atiered interest rate structure. For example, if the credit customer pays2% of the outstanding balance in a billing cycle, the interest appliedto the remaining outstanding balance is 16.5%; if the credit customerpays 3% of the outstanding balance, the applied interest rate is reducedto 12.9%; and if the credit customer pays 5% or more of the outstandingbalance, the applied interest rate is further reduced to 8.9%. Ofcourse, other interest rates and payment percentages can be applied, aswell as different numbers of interest rate “tiers,” without departingfrom the scope of the present invention.

Consequently, the system and method of the present invention issufficiently flexible to accommodate month-to-month variations in acredit customer's financial situation by offering a number of differentpayment options. The tiered applied interest rate structure of theinvention allows the credit customer to choose his or her minimumpayment and interest rate.

The system and method of the preferred embodiment of the presentinvention also provides a display, which may be on a monitor or inprinted form, of the previous outstanding balance, the paymentsreceived, the finance charge applied, the new outstanding balance andthe minimum payment amounts necessary to qualify the credit customer foreach interest rate level.

The system is designed to be operable on a personal computer, or networkof personal computers, and includes software having a set ofinstructions for operating the personal computer. The software is storedon a disk, tape, hard drive or other storage media, and is loaded intothe memory of the computer from storage during use. All informationpertaining to the account is kept in storage in the computer, as is thetable of percentages and corresponding interest rates. Each transaction,whether it is a payment or a debit to the account, is also entered andstored for each account.

The system is adaptable to be used with credit card programs, homeequity loan programs, and unsecured lines of credit, to consumers forpersonal, family and household purposes, as well as to business entitiesfor business, agricultural, and governmental uses.

Accordingly, it is an object of the present invention to provide asystem and method for operating a revolving credit program; a system andmethod for operating a revolving credit program which encourages acredit customer to pay off an outstanding account balance quickly; asystem and method for operating a revolving credit program having atiered interest rate structure such that a lower interest rate isapplied to a remaining outstanding balance in response to higher balancepercentage pay off in a billing period; and a system and method foroperating a revolving credit program which runs from a personal computerand/or network platform.

Other objects and advantages of the present invention will be apparentfrom the following description, accompanying drawing and the appendedclaims.

BRIEF DESCRIPTION OF THE DRAWING

The FIGURE is a flow chart showing the operation of the method of thepresent invention on a personal computer or computer network.

DETAILED DESCRIPTION

The FIGURE shows a flow chart which represents the operation of apersonal computer or computer network programmed to embody the system ofthe present invention and to perform the method of the presentinvention. The instructions for performing the process of the systempreferably are in the form of computer software which is kept in astorage medium, such as a disk, tape, hard drive or the like. Thesoftware is loaded into computer memory from storage when the program isto be implemented.

The Functional block 10 represents the “wait state” of the system. Themethod of the invention is triggered by the occurrence of either the endof a billing period or a transaction being entered into a creditcustomer's account. In the preferred embodiment, a timing program (notshown) internal to the computer platform operated according to themethod of the invention will signal the system of the end of a billingperiod, which may correspond with the end of a calendar month.Accordingly, functional block 12 indicates that the system is activatedat the end of a billing period, or, as shown in block 14, if atransaction is entered. If no transaction occurs, and the end of abilling cycle has not occurred, the system remains in the wait state ofblock 10.

If there is a transaction, as shown in block 14, the operator or systementers the credit customer's account number, the nature of thetransaction (i.e., payment, debit or the like) and the date of thetransaction, as shown in block 16. This information is stored in thecomputer system, as shown in block 18.

The central processing unit of the computer system then reads intomemory from storage the current outstanding balance of the creditcustomer's account, as shown in block 20. Once the current outstandingbalance is read into memory, the outstanding balance is adjusted by thetransaction amount in order to arrive at a new, interim outstandingbalance (“I.O.B.”), as shown in block 22. This new interim outstandingbalance is then stored in the system, as shown in block 24. The systemthen returns to the wait state of block 10. This iteration throughblocks 10-24 may occur several times in the course of a billing cycle,each time a transaction is entered. A billing cycle typically is a onemonth or thirty day calendar period, but may be any time periodcontracted upon by the credit provider and the credit consumer.

At the end of the billing period, shown at block 12, the system isprogrammed to calculate an average daily balance, shown in block 26. Theaverage daily balance method is a conventional calculation in which theinterim outstanding balance at each day of the current billing period isdetermined, then averaging the daily balances over the billing period.In the alternative, the system may be programmed to calculate financecharges based on ending balance, two cycle average daily balance, andthe like, without departing from the scope of the present invention.This average daily balance, or amount calculated using an alternativemethod as explained above, is then stored in the system, as shown inblock 28. In addition, the total payments made during the currentbilling period are summed and stored, as shown in block 30.

The central processing unit next calculates the percentage the totalpayments made during the current billing period comprise of the previousmonth's outstanding balance, or the percentage of balance reduction, asshown in block 32. The unit then reads a stored table of percentages andcorresponding tiered interest rates, as shown in block 34, and comparesthe calculated percentage of balance reduction of block 32 to match itwith one of the stored percentages of the table. Each stored percentageon the table has a corresponding interest rate. In the alternative, thesystem can utilize other customer account parameters, such as comparingthe balance reduction to the beginning balance or to the highest balancein the billing cycle to determine a percentage, without departing fromthe scope of the invention.

The interest rate corresponding to the percentage which matches thepercentage of balance reduction calculated in block 32 is then selectedas the applied interest rate, all as shown in block 34. The appliedinterest rate selected in block 34 is then applied to the average dailybalance calculated in block 26 and stored in block 28, to arrive at afinance charge, as shown in block 36.

The finance charge is then added into the interim outstanding balance,calculated in block 24, to arrive at a new balance. This new balancevalue is then stored, as shown in block 38. The new balance then becomesthe “outstanding balance” which is read and adjusted pursuant to theprocess shown in blocks 14-24 in the next billing cycle.

Using the new balance calculated in block 38, the system then calculatesthe minimum payments necessary to meet the threshold percentagesnecessary to qualify for the varying tiered interest rates of block 34,as shown in block 40. Finally, a statement (or terminal display) isgenerated by the system which shows values for the new balancecalculated in block 38, the finance charge calculated in block 36, andthe proposed minimum payments calculated in block 40 to qualify for eachtiered level of interest, as shown in block 42. The statement maycontain any or all of this information in addition to other accountinformation and disclosures as required by federal law and subject tochange from time to time.

If the display is in the form of a statement, the statement is then sentto the credit customer. Therefore, the credit customer not only receivesa current status report of his or her account, showing the current newbalance, the finance charge applied and the payments received in thejust-completed billing cycle, but the credit customer also receives aschedule of minimum payments necessary to qualify for each tier ofreduced interest rates effective for the customer's next billing cycle.

Specific Example

In a specific example, the table of percentages which is read in block34 may be as follows:

TABLE 1 Percent of Outstanding Balance Paid Applied Ann. Int. Rate 5%and over  8.9% 3% to 4.99% 12.9% 2% to 2.99% 16.5%

If a credit customer has an outstanding balance at the end of a billingperiod of, for example, $2,000.00 (comprising, for example, principal of$1985.00 and a finance charge of $15.00), and during the course of thesubsequent billing period makes a payment on day 14 of that subsequentbilling period of $100.00, the balance at the end of that subsequentbilling period (before the finance charge is applied) will be $1,900.00,a balance reduction of 5%. Then, according to the Table I set forthabove, the credit customer qualifies for an applied annual interest rateof 8.9%, which is a monthly periodic rate of 0.7416%.

This 0.7416% is applied to the average daily balance to arrive at thefinance charge. In this example, the average daily balance would be$1936.83, which is arrived at by adding up the outstanding unpaidprincipal balance for each day of the billing period and dividing thetotal by the number of days in the billing period (for example, 30days):$\frac{\left( {{\$ 1985}{.00} \times 13\quad {days}} \right) + \left( {{\$ 1900}{.00} \times 17\quad {days}} \right)}{30\quad {days}} = {{\$ 1936}{.83}}$

The finance charge would then be $14.36 ($1,936.83×0.7416%), making anew balance of $1,914.36. The calculations would be similar for anyending balance representing an outstanding balance reduction of 5% ormore, up to but not including full payment of the outstanding balance.Specifically, the same monthly periodic rate would be applied from thetable, but the average daily balance, and therefore the finance charge,would be less.

If the credit customer pays only $60.00, which would result in a balancereduction of 3%, according to Table 1, an annual interest rate of 12.9%(which is a monthly periodic rate of 1.075%) is applied to the averagedaily balance, which would be $1,959.76 (assuming payment of the $60.00is made on day 14 of the billing cycle), resulting in a finance chargeof $21.06, which is added to the interim outstanding balance of$1,940.00, for a new balance of $1961.06. The system would performsimilar calculations for any ending balance representing an outstandingbalance reduction of at least 3% and up to 5%.

Similarly, if the credit customer pays only 2% of the $2,000.00outstanding balance, a payment of $40.00, the average daily balancewould be $1,970.83 (again assuming the payment of $40.00 is made on day14 of the billing cycle), and the applied annual interest rate for a 2%balance reduction taken from Table I is 16.5%, a monthly periodic rateof 1.375%. The finance charge is then $27.09. Accordingly, the newbalance would be $1,987.09. However, if the credit customer pays lessthan 2% of the outstanding balance, the same annual interest rate isapplied, but that credit customer would be considered delinquent.

Of course, the look-up table represented by Table I above and utilizedin block 34 of the Figure can be varied to provide for different numbersof “tiers,” or for different interest rates for each percentage tier, orfor different percentages of balance reduction without departing fromthe scope of the present invention.

Applying the values set forth to the display block 42 of FIG. 1, for a5% balance reduction (i.e., a payment of $100.00 toward an outstandingbalance of $2,000.00 in the specific example), the display would includea listing of the new balance of $1,914.36. Furthermore, the display ofblock 42 would also include a listing of the minimum payments necessaryto meet the 5%-3%-2% outstanding balance reduction to qualify for eachof the tiered interest rates of 8.9%, 1-2.9% and 16.5%, respectively,namely, payments of $96.00, $58.00, and $39.00, respectively, for theoutstanding balance of $1914.36 discussed above. These minimum paymentamounts may be rounded up or down to the nearest dollar amount withoutdeparting from the scope of the present invention.

In conclusion, the credit customer is encouraged to make larger paymentswhich represent larger percentages of the outstanding balance in orderto qualify for the corresponding lower applied interest rate. The endresult desired by the credit provider who utilizes this system would befewer delinquent accounts.

The tiered interest rate system of the present invention can be utilizedwith any revolving credit program, including credit card programs, homeequity lines of credit, and secured and unsecured lines of credit. Suchprograms can be used by individuals for home, consumer product andautomobile purchases, and by businesses and governmental entities forcommercial and agricultural purchases.

While the form of apparatus and method herein described constitutepreferred embodiments of this invention, it is to be understood that theinvention is not limited to these precise forms of apparatus andmethods, and that changes may be made therein without departing from thescope of the invention.

What is claimed is:
 1. A data storage medium including machine readablecode thereon for use in a computer system or a computer network saidcomputer system or computer network having a system for storinginformation, and a system for calculating financial information, thestorage medium comprising: means for storing information in a memorydevice pertaining to a credit customer's account, calculating appliedinterest and finance charges and transmitting display information aboutsaid account, said information selected from a group consisting of avalue of an outstanding balance of said account and an amount of apayment transaction pertaining to said account; means for determining anapplied interest rate based on a percentage determined by a ratiodetermined by the amount of said transaction amount in relation to saidaccount parameter; means for calculating a finance charge from saidapplied interest rate; and means for adding said finance charge to saidinterim outstanding balance to get a new outstanding balance, andstoring said new outstanding balance.
 2. The data storage medium ofclaim 1 wherein said means for determining an applied interest rateincludes means for matching said percentage to a table of storedpercentages, each of said stored percentages corresponding to a selectedinterest rate, to determine an applied interest rate from said selectedinterest rates.
 3. The data storage medium of claim 1 furthercomprising: means for calculating an interim outstanding balance byadjusting said outstanding balance by said transaction amount; and meansfor calculating a percentage of reduction of said outstanding balancecorresponding to said transaction amount.
 4. A computer networkimplemented method for a revolving credit system utilizing a tieredinterest rate structure performed on or with aid of a system storinginformation pertaining to a credit account and calculating appliedinterest and finance charges, the method comprising: retrieving a storedfirst value corresponding to an outstanding balance of said account;inputting a second value corresponding to a transaction pertaining tosaid account; calculating a ratio of said second value to said firstvalue; determining an interest rate based on said ratio; determining afinance charge based on said interest rate; and transmitting via thenetwork a new account balance of said account based on said first valueand at least one element selected from a group consisting of saidfinance charge, said interest rate and said ratio.
 5. The method ofclaim 4 wherein said transaction pertaining to said accountcorresponding to the second inputted value is a payment made on saidaccount.
 6. The method of claim 4 wherein said credit account comprisesa tiered interest rate credit card.
 7. The method of claim 4 whereinsaid credit account comprises a home equity loan.
 8. The method of claim4 wherein said credit account comprises a line of credit.
 9. A methodfor a revolving credit system utilizing a tiered interest rate structureperformed on or with aid of a system storing information pertaining to acredit account and calculating applied interest and finance charges, themethod comprising: retrieving a stored first value from an electronicdatabase corresponding to an outstanding balance of said account;receiving a second value corresponding to a transaction pertaining tosaid account; calculating a ratio of said second value to said firstvalue; determining an interest rate based on said ratio; and displayingsaid interest rate.
 10. The method of claim 9 said interest ratedetermined in said step of determining an interest rate depends uponsaid ratio, a higher ratio providing a lower interest rate.
 11. Themethod of claim 9 further comprising: determining a finance charge basedon said interest rate; and determining a new account balance of saidaccount based on said first value and at least one element selected froma group consisting of said finance charge, said interest rate and saidratio.
 12. The method of claim 9 wherein said credit account comprises atiered interest rate credit card.
 13. The method of claim 9 wherein saidcredit account comprises a home equity loan.
 14. The method of claim 9wherein said credit account comprises a line of credit.